Polishing my mirror

reflecting the collaborative reality of our networked world

Category: Finance

The trend is clear. Pensions are increasing allocations to alternatives. What are the logical impacts of this trend?

I do not know the answer. However I do believe it is an important question to consider.

According to Willis Towers Watson, global multinational risk management, insurance brokerage and advisory company, the allocations to other (non-cash, non-stock non-bond) investments among US pensions has grown from 17% in 2006 to 27% in 2016. That is about 1% a year increase in allocations to mostly PE/Hedge Funds. The US Pensions size as of 2016 was $22.48 Trillion. Yes, Trillion!

From the PE/Hedge Fund industry perspective this is outstanding development! If we assume linear progression we are talking about $225 Billion in new AUM just last year.

If you talk to those PE/Hedge Funds you will find out that it is increasingly difficult to find “good” deals. Part of the reason for it has to do with the massive amount of money looking for those deals.

The Fed has lowered the federal funds rate to almost zero to stimulate the economy post the ’08 recession. The institutional investors that historically relied on annuities as part of their business had to adjust. Pensions are case and point. The increase in allocations to alternatives to cover the decline in returns from the bond and stock portfolio is the current drug of choice. Before it was shift to stocks from bonds.

At the macro level we are shifting the societal algorithm of capital allocation. Hence my original question. What are the logical implications of this allocation shift?

Is increased allocation to alternatives correlated with more investment dollars flowing into private vs. public companies? What does that mean?

What is the relation of the higher required returns of alternatives to the total system returns? Is the level of required return god proxy for risk in the system?

The trillion-dollar systemic question has to be if we are creating more wealth by shifting allocation to channels that requiring higher returns or are we just shifting the distribution of the aggregate wealth?

Combined with the continuing growth in indexing/ETF’s in public markets, what’s the future of private vs. public markets?

Do pension allocations even matter? As we have shifted from Defined Benefit (DB) to Defined Contribution (DC) should we be more focused on the allocations of all the Mutual Funds in all of our 401(k) plans? Or better yet, what investment system/wallet will rule the day after the 401k dies? What will be the impact on the financial services industry? What companies will be advantaged by that system yet to come into existence? Remember, the future is already here. It is just not evenly distributed.

We live in transformative times! We are moving past our industrial history into the unknown digital future. The resultant structural shifts in the economy are not very transparent. We see on the surface destruction of old industries and creation of billions in completely new fields. The last election in USA and Brexit in EU are some of the more visible testimonials that we miss the implications of it all. We miss it for the masses, for our institutions and for corporations. But the future is already here, embryos of the next BlackRock, of the next Vanguard are here! Who do you think they are?

Who will fund those new structures that will shape our financial future? Will they be shaped by the General Partners of the PE funds bolstered by the pension shifts to alternatives? Or will they fund growth by listing on public exchanges? Or via ICO?

I have no answers, though I am fascinated by the drama of it all playing out in front of us. We should ask more such questions as we are actively shaping this exciting transformation of out society and our organizations.

Advertisements

Do you know a developer looking for a business partner in the Atlanta area?

I am looking for a tech partner to build a finch startup together and change the world of finance! Who’s in!?!?

Do you know someone in the Atlanta area who would be a good partner for this venture? Please put me in touch.

Over the last 7 years I have learned a LOT about financial services, global business and startups. The spread of startups and the step up in the speed of change is truly the thing that gives me most hope for our kids. Ok, that’s bull. The pace of change is so rapid that it gives me hope for ourselves!!

In March my wife gave birth to two beautiful twins. Around the same time, the earlier startup I was working on dissolved after a year of excitement. This worked out well, providing me the time for the babies and for reflection on what to do next.

A VC partner advised me to start attending Friday lunches and pitch practices that take place after lunch at the Atlanta Tech Village. I did that and discovered a wonderful community of entrepreneurs in Atlanta.

About a month ago at one of the pitch practices, I got up and pitched the idea that has bothered me for years. To my surprise people liked the idea.

Now I have no doubt what I want to do!! Check out my video from the YC Fellowship application.

I got two quotes from local developers for building the Minimum Viable Product (MVP) to go to market. One quote was $25k from an independent developer, and $36k from a company. Unfortunately, I do not have the money, if I did I would be already building it!!!!!

A VC friend advised me that there is no way I will raise this little money on power point alone. Those days are gone. This early stage is usually covered by family and friends investments. I have spent too much time fundraising in the past to take the long drown out fundraising on an idea route.

Without the access to capital, the only way to do what I have dreamed of doing forever is to look for a technical partner who could convert my product wireframes into the MVP1 and go to market that way. Next, gain traction and raise capital to grow! That is why I am now recruiting a technical partner. Please help!

To be perfectly honest, it is a very selfish idea. I want advice on managing my stock portfolio. There is plenty of advice out there, however, almost all in the wrong tenor. The washed down Wall Street advice makes me have dry-heaves. I have been working, studying, living with finance for decades now. Having lived in the devils den and having slept with the enemy, I know what I want, and its is not what’s available.

I am looking for a programmer to partner with me to democratize the world of finance. It is time to step up the good work that John Bogle did in the 70’s when he set up Vanguard. It’s time to update the concepts for our time.

If you are interested or if you know a great programmer that I should talk to, ping me!

Check out the co-founder position on Angel.co and tell your friends about the opportunity!!!

 

The time for building new marketplaces to re-invent financial services is still in front of us!!

“The link between investors and business has largely been severed, with Wall Street acting as intermediating force, collecting fees – or rent, in economic jargon – every step of the way.” – Amy Cortese, Locavesting

Re-inventing financial services is important because we need to reestablish the link between the investors or the saving and consuming public and all the companies raising debt or equity.

The World Economic Forum states that “the role of financial services in society is to facilitate efficient allocation of capital to support economic growth”. Unfortunately, the saving public delegates their capital allocation responsibility to the experts on Wall Street.

“When we hand over responsibility to the experts we cause massive problems with our food system” – Michael Polan. The same is true of the financial system. Besides loosing money to the agency cost, we are loosing the value judgment over the kind of impact we want from our investments. Luckily we live in an age where technology is available for massive collaboration that will challenge the authority of the so called investment experts. The challenge we are facing today is that the financial marketplaces which will connect social minded companies that look for social minded employees who want to do good with individual investors are not yet assembled.

The incentives however for hands-on management of our retirement savings have never been stronger. Over the last few decades public sector defined benefit pension plans have became virtually extinct. The shift toward defined contribution pension plans transfers the investment risk from the corporations to the working public. The legacy financial services industry has not and will not offer people practical tools to manage their newly acquired investment risk, and people continue to delegate their capital allocation to Wall Street. We need to re-invent financial services to help people manage their new market realities.

For companies, the post-recession credit crunch limited access to capital from banking institutions. Crowd-funding and marketplace lending is starting to bridge the funding gap and offers an opportunity to reestablish the link between companies and investing consumers. Unfortunately the peer-to-peer promise has been overflown with institutional investors, yes the professionals came in with heir money.

It is amazing that people still believe the myth that capital allocations should be delegated to the “smartest people in the room”. People are told that voting with their dollars at the cash register is the best that they can do. However, once a service or product has been created it is too late, somebody has already made the funding decision. We are all investors and we can improve that feedback loop.

The marketplace change is not happening as quickly as we would like. Even if we, the consuming investors, start thinking in terms of connecting with socially conscious companies that’s not enough. Companies, as they go about financing decisions need to start looking directly for the consuming public for hep, and with crowd funding and peer-to-peer industry moving into mainstream we will get there. Once Companies seeking funds and investors looking for investment vehicles, debt or equity, find a marketplace platforms where they can meet and support each other along the lines of affinity and value, who will need experts?

This idea though is not new. Already in the 80s Peter Lynch was ahead of his time. He taught people that it is impossible to be a credit card carrying consumer without having done the fundamental analysis on dozens of companies. Today we can top that by sharing our consumer research with each other for investment purposes. Thus we do not even need investment advisors.

This vision of new financial services powered by marketplaces connecting investing consumers with businesses will not become the mainstream reality until we stop believing the into the need for delegation to experts. But that is a chicken and egg problem. What will be first, the systems and tools for new finance or our desire for such tools. All new finance products need to converge into an ecosystem that will comfortably fit in the palm of my hand on my smart phone. Once we have access to all the crowd-funded securities in my open-source collaborative portfolio, we will have re-invented finance and disrupted the legacy financial services business model based on centralized allocation of capital by experts.

Why do I believe this will happen sooner than you think? For one there is a pot of gold at the end of this disruption rainbow. And for two we have the technology to do this!